The Bail Out Passed. What Next?

What a dramatic week for investors.  Correction, what a dramatic week for Americans.  We hear a lot about Wall Street and Main Street, and how this bill was necessary for both.  Time will tell who benefits more - Main Street or Wall Street.

There are some key provisions in this bill which will have immediate impact on Main Street and Wall Street.  FDIC deposit insurance is increased from $100,000.00 to $250,000.00.  More importantly this bill suspended mark-to-market accounting rules.  What that means is that financial institutions can subjectively value their asset base instead of valuing assets at what the current market will bring for the asset.  Bank balance sheets will improve immediately, and this alone should "unfreeze" the credit markets.  Increasing the value of assets reduces the need for banks to raise capital by selling those assets to the Government.  In fact, the need to sell those assets to the Government is decreased.  What the $700,000,000,000.00 bail out does is recapitalize the banking system through a vehicle other than the Fed.

What does all this mean to Main Street?  What it should mean over the next quarter is that credit worthy borrowers should get access to capital at reasonable rates.  Remember the Federal Funds target rate is still 2%, as credit tensions ease within the financial system lower rates should flow to consumers - although expect banks to take advantage of the tight market and maximize the spread between what they pay for money, and what they charge consumers for money.

A rapid recovery from this recession is unlikely.  Sub prime mortgage holders did not get any relief, and the housing market still needs to work through excess inventory.  From a demand side, consumers have little impetus to spend.  Asset values are down, and will take several quarters to recover - in Main Street terms, your house is worth less, your portfolio is worth less, and your business has less value.  Slow consumer spending adversely affects manufacturing, wholesale, and retail, which in turn continues to put downward pressure on asset values.  

On the positive side, the price of oil is continuing to decrease, and may very well drop to $70.00 per bbl before recovering.   More than driving down prices at the pump, oil is a basic manufacturing ingredient, its continuing price decrease leads to decreases in production costs.  The recovery effect of lower prices should become evident in the 2nd quarter of 2009.

Also, the next administration whether Democratic or Republican will probably enact an economic stimulus package.  This will contribute to a demand side - consumer - economic recovery.

On the supply side, the most immediate positive impact is the relative low price of raw materials. This allows manufacturing costs to stay down, and should contribute to an increase in production - more jobs.  However, inventories will grow slowly in response to demand.  In the short and medium term, out to two years, there is little to spur supply side growth.  Productivity is steady, and there is little in immediate technology to contribute to supply side economic expansion.

Assuming a slow recovery and slow, steady growth over the next year, where should investors put their money?  As in previous posts I'll stick to my mantra, think long.  Good assets are on sale now.  

If you're a stock investor, bet on Buffet.  Look where he put his money, and follow suit.  His track record speaks for itself.  Your probability of success is even greater when you take the time to study and learn how much control Warren Buffet has on both his investments and the investment environment.  When betting Buffet as an individual investor, remember, he has more staying power than you do.  Be careful if your portfolio is sensitive to volatility or you'll need short term liquidity. 

In terms of hard assets, specifically Real Estate, now is the time to look at land.  If you have some staying power, you can find some incredible bargains - in real terms, land prices haven't been this low in a generation.  Look for good land, study growth patterns, study community development plans, study infrastructure plans, buy some dirt and hold it.  If you don't like land, buy investment properties.  If you work with sellers, you can get into properties for 10% to 20% down.  If you finance your purchase through a bank, expect to have at least a 30% equity requirement.

In short, now is the time to get back in.  The full impact of the bail out will take up to ten years to play out, and that's the subject of another post.  The most immediate impact of the bail out is that it has probably defined the bottom of this recession.  There are some good deals on the market, take advantage.